LOS ANGELES – Two of California's biggest health insurers agreed yesterday to collectively pay $13 million and reinstate more than 2,000 insurance policies to settle claims with the state that they illegally dropped policyholders from coverage.

Anthem Blue Cross will pay $10 million and reinstate coverage for 1,770 enrollees while Blue Shield of California will pay $3 million and reinstate coverage for 450 enrollees. Both insurers also will reimburse policyholders for medical debts that resulted from loss of insurance.

“This fine sends the message that if you come into California to sell health insurance, you must play by the rules,” said Cindy Ehnes, the director of the state's Department of Managed Health Care.

Both companies denied wrongdoing in rescission practices, the industry's term for dropping patients from coverage when they make claims on their health insurance policies.

The settlements come two weeks after Ehnes said the state failed to pursue a $1 million fine against Anthem Blue Cross because it was intimidated by the insurance company's legal prowess.

Days later, the state vowed to seek penalties against Anthem Blue Cross that could have totaled $354 million.

In all, 3,770 dropped insurance policies have been restored through the effort to remediate rescission practices with the state's five biggest insurers.

Anthem Blue Cross President Leslie Margolin issued a statement saying the state's largest insurer was pleased to have reached an agreement with the state.

Last week, Ehnes warned that insurers who didn't reach settlements would face stiffer penalties. The agency has reached similar agreements with Health Net of California, PacifiCare and Kaiser Permanente.

Blue Shield Vice President Tom Epstein said its settlement was a voluntary decision. “We did not acknowledge that any of our practices were inappropriate,” he said.

Gov. Arnold Schwarzenegger applauded both agreements, adding “patients should not live in fear of unfairly losing their health care coverage when they need it most.”

Epstein said Blue Shield came to agreement because it recognizes there was a lack of direction from the state on rescission practices and wants to put the issue behind it.

Blue Shield could face an additional $2 million fine in 18 months if it doesn't simplify applications and be transparent with enrollees in the event they're under investigation and risk losing coverage, Ehnes said.

“We are certain to do those processes to avoid that fine,” Epstein said.

In 2007, Anthem Blue Cross had more than 4.1 million enrollees in full-service health plans in California, and Blue Shield of California had more than 2.6 million enrollees.